Committee Reports > List of Committees > Joint > 1981 > Committee on State Sponsored Bodies > Report No. 16 - Nitrigin Eireann Teoranta

APPENDIX 5

MEMORANDUM FROM NÍTRIGIN ÉIREANN TEORANTA

MARINO POINT PROJECT

PROJECT INITIATION AND SELECTION OF CONTRACTOR

The Marino Point project had its origins in the development of the production facilities at Arklow. NET had expanded the fertilizer production units at Arklow in line with the increased demand for nitrogen without any increase in the production capacity of the Ammonia plant at Arklow. The extra needs for Ammonia at Arklow, over and above its own production capacity, were supplied by importing Ammonia from European sources. It was apparent, however, to NET that the Company was becoming over dependent on Ammonia imports and that it was essential to investigate the possibility of more Ammonia production capacity in this country. In 1972 the Company started its examination of future Ammonia production possibilities. Because of the limitations of Arklow harbour and the need, as it appeared at that time, to continue to import oil feedstock, alternative locations in Ireland for a major plant for Ammonia production were examined. Cork harbour was considered the best location and the Company had already viewed possible sites for an Ammonia plant based on imported Naphtha of Fuel Oil, when the discovery of Natural Gas in commercial quantities was announced in the Autumn of 1973. Natural Gas is the most suitable feedstock for Ammonia production and the Company immediately made known its desire for a supply of gas. The use of gas feedstock also made it possible to consider a quantum jump in capacity which would make Ammonia available to meet the nitrogen needs of the Irish market into the mid-1980’s. In this way also, the Company was able to choose the optimum size plant.

In 1973 NET purchased a total of 26 hectares (65 acres) of land at Marino Point. The peninsular site adjoins deep water, is connected to the railway system, is in close proximity to all mainshore services and has access to a pool of labour at nearby Cork city and in the local area. Through reclamation, the total site area was increased to 41 hectares (103 acres). Marino Point is located approximately 16 kilometres from Inch Beach where Natural Gas is brought ashore from the Kinsale Head Gasfield.

A preliminary report was made to the Board of NET in September, 1973, outlining the major factors to be taken into account in regard to an Ammonia and Urea project. On the basis of this report, the Board gave approval in principle to the Management to proceed with negotiations with international plant contractors, with a view to securing tenders for the erection of an Ammonia and Urea complex at Marino Point. The preliminary negotiations were conducted with a large number of contracting firms with a view to eliminating those contractors not meeting the requirements of pre-qualifications tests. Finally, 3 firms were invited to tender for the project—Uhde (West Germany), Kellogg (UK) and Foste. Wheeler (UK), the latter 2 being subsidiaries of American contracting corporations.

In the negotiations with contractors, the NET project team had the assistance of specialised consultants, Scientific Design Co. Ltd., a well-known international consultancy organisation in the heavy chemical field. The terms of the technical assistance consultancy provided by Scientific Design Co. Ltd., were to make available the services of their Engineering Director and Senior Project Manager to assist in the preparation of the Invitation to Bid documentation, including the form of contract, and subsequently the Evaluation of the Bids. This enabled the project management resources of Scientific Design Co. Ltd. and the specific experience of Scientific Design Co. Ltd. personnel in the Ammonia/Urea field to be available to the NET project team.

After detailed comparison of the tenders of the 3 contractors, it was decided that the offer made by Kellogg was the most competitive and would provide a plant with the greatest reliability and optimum performance.

CONTRACT AWARD AND FORM OF CONTRACT

NET’s experience of chemical plant contracts goes back to 1961 and many contracts placed for the original Arklow plant and subsequent new plants there were based on international practice. Chemical plant contracts are drawn up to protect the client against failure of the plant to perform within guarantee limits. The approach of the client to the contract is, therefore, to make one main contractor responsible for the entire operation, even though a large amount of the total project is sub-contracted. There are financial penalties in the contract under various headings to cover failure of the equipment to perform efficiently and deficiencies in product quality. A very serious problem can arise for a client where the plant performs below the guarantee limit to a serious extent, and in such cases the client may have to resort to a legal action for fundamental breach of contract. The contractor is not released from responsibility under the contract until the plant has passed its Acceptance Tests as defined in the contract.

The form of contract was under active examination from early 1973 onwards. Alternative contract systems were fully examined, including fixed price, lump sum and reimbursable. It was established that the fixed price contract system, which NET had adopted since 1961, would not now be available. NET’s priority was to select the most reputable contractors capable of handling this major Ammonia/Urea project and have competitive tendering between those selected contractors. This put the emphasis on the experience and reputation of the contractor. When it became clear that no one of the selected contractors would operate on a fixed price basis, NET was faced with having to negotiate a contract on a mutually acceptable system. The contract was awarded to Kellogg on a reimbursement basis. The provision for retentions was met by a Bank Guarantee to afford NET security in lieu of retention money.

The reimbursable form of contract involved negotiating an agreement with the contractor for services provided directly by his organisation. The Kellogg charges for design knowhow and all other home office services were fixed and were set out in the Letter of Intent. Charges for Kellogg personnel on site were subject to agreement between Kellogg and NET and were tied in to recognised indices wherever possible. The terms of the Letter of Intent were amended by increases in the overall scope which were established to be a change in the original basis of agreement.

The payments under the contract other than Kellogg charges were in respect of materials purchased through the Kellogg organisation, direct hire of personnel by Kellogg on site for mechanical erection of the plant and sub-contracts awarded by Kellogg with approval by NET.

All payments made by Kellogg were subject to approval by NET. The procedure is fully documented.

The reimbursable form of contract means that the contractor is not liable for total cost. Control is exercised by the client examining and authorising expenditure on purchase of materials and outgoings on the factory site.

Model forms of contract relevant to this exercise include:—

“Model form of Conditions of Contract for Process Plants, suitable for Reimbursable Contracts in the UK”, Institution of Chemical Engineers. (I. Chem. E.)

“Third Draft of the UNIDO Model Form of Cost Reimbursable Contract for the Construction of a Fertilizer Plant”. UN Industrial Development Organisation.

The I. Chem. E. model is widely used in the process engineering industry whereas the UN model is still in draft form and has not yet been accepted by contracting firms. Copies of these documents are enclosed.

The contractor is not liable for total cost under either of the Model Forms of Reimbursable contract. Article 38 (Contract Price) & Schedules C & D of the Institution of Chemical Engineers Model Form and Article 20 (Contract Price) of the UN Model state the rules which govern the contractor liable for total cost.

Furthermore, neither model form requires the contractor (as had been suggested by the Consultants to the Joint Committee) “to quote firm prices for supply, delivery and construction of all plant equipment and materials for the battery limits plant to be adjusted by a Contract Price Adjustment Formula”. This procedure would be a feature of a Lump Sum Contract rather than a reimbursable one. Normal contracting practice does not impose on the contractor liabilities for total cost by this method.

The Institution of Chemical Engineers (Guide Note F) suggests that liability of the contractor for late completion is “more typical of a lump sum arrangement and largely incompatible with the philosophy of a reimbursable contract. If liquidated damages for delay are to apply they should be agreed between the parties at a stage when the contractor can assess his financial risks and take them into account in his price”.

The UN Model Form (Section 27.1.1 (a)) provides for unspecified damages for each week of delay up to an unspecified maximum contractor liability. The charge for this liability would be included in the fixed fee charge payable to the contractor if a reimbursable contract is used.

NET has had, in the past, provisions in fixed price contracts in respect of late completion. In some cases, it has successfully acted as an incentive towards expediting completion. In fact, however, the contractor is able to avail of provisions in regard to force majeure to nullify the real value of the agreed completion date. It is the experience of NET that the contractor includes in his fixed price a substantial provision to cover his liabilities for late completion and this can be an extra cost without real benefit to the client. The attitude of contractors is based on their actual experience of delays in delivery and construction. In regard to the Marino Point project, Scientific Design Co. Ltd., take the view that had progressive sanctions been included in the contractors agreement for delays, the time taken in proving these would, or at least could, have further delayed completion.

SCHEDULE

The Schedule was fixed under the contract as 36 months from 1st January, 1975. This period was arrived at through consultation between the tendering contractors and NET, taking account of reasonable provision for force majeure during the various stages of design, procurement, civil work, erection and pre-commissioning.

It is relevant to comment at the outset on the schedule period and how realistic it was from experience in UK and world-wide on major projects. NET had discussions with fertiliser manufacturers throughout Europe and USA and were deeply involved with the three major contractors at the tendering stage. The contractors proposals varied from 30 to 33 months schedule. It was not in the interests of NET to fix a schedule longer than the proper time deemed for such a job. To do so would relieve the contractor of pressure to perform on time and would be very costly for NET, Irrespective of what happened by hindsight, if NET were going out to make a contract now, they would still expect the contractor to perform to a realistic schedule. The main question is, therefore, was a 36 months schedule realistic?

The evidence in the Report of the Comparative Construction Performance Working Party—“Engineering Construction Performance”, published by the National Economic Development Office, London, in December, 1976, on major engineering construction contracts, was that UK contracts took longer both on total project time (from project definition to completion of construction) and on construction time on site (from start of civil engineering), than comparable projects abroad. NET has given a copy of this Report to the Consultants to the Joint Committee.

International experience appears to indicate that 3 years would be the appropriate minimum schedule for good performance on major projects in Europe and USA, with 3½ years as a fallback position. The available evidence suggests that one year should be added for UK projects and our national experience is on similar lines.

The schedule was the calendar years 1975, 1976 and 1977. The delays calculated by NET total 15 months, taking the actual gas-in date of 14th April, 1979.

The record compiled by NET indicates that the site was affected by industrial relations events for 323 days or one year for a six day working week. To attribute the bulk of the delay, therefore, to these events would seem to provide a simple explanation, but it would be very misleading to do so as other factors have to be taken into account.

The estimation of NET is that the influences of over-run on total cost represented 33% for Industrial Relations problems and bad weather. Several factors influencing the schedule in an adverse manner were developing simultaneously—estimation and scope changes; design and procurement problems; industrial relations; absenteeism and weather difficulties. The total of those factors has been critically examined to see their overall effect on a total delay of 15 months and this is estimated as follows:—

Piping erection started about 7 months late due to delays in Kellogg home office design work (3 months) and inadequate ordering of piping materials (4 months). There was of course some overlap with site problems. Our estimate of net delay on design and procurement is, therefore, 6 months, including some delays arising from the special provisions of the Planning Permission. In addition, the Urea plant was delayed to allow priority to the Ammonia units.

PROJECT PLANNING

The Consultants to the Joint Committee outline the pre-planning requirements for a major process project and indicate that NET did not develop a “grand design” at the pre-planning stage.

NET agrees with the Consultants views about the need for pre-planning and did in fact carry out all the necessary investigations before proposals for Planning Permission were submitted in a most comprehensive manner to the Planning Authority. The complex, as built, conforms to that submission with the minimum amount of changes which were found necessary as a result of the planning conditions and detailed design developments.

The project was handled by a special team of NET personnel experienced in the planning and construction of new chemical plants at Arklow. NET had in fact negotiated and completed a number of substantial contracts at Arklow since 1961. In addition, when preparing the enquiry documents for issue to nominated tendering contractors, the tender documents and in the selection of the contractor, NET employed the services of Scientific Design Co. Ltd., London. Scientific Design are a firm of international contractors specialising in providing project management for ammonia and urea projects throughout the world. The two people provided by Scientific Design were a Senior Project Manager and a specialist on the commercial contractual side, himself a Director of Scientific Design. During the design and construction phase Scientific Design services were available to NET as required. NET employed a Project Manager from Scientific Design Co. Ltd., full-time in the construction team for cost control purposes from 1976 to 1979.

The engineering design, licensing fees, procurement and all home office services necessary for the completion of the project were on a fixed fee basis with no escalation. Changes in this fee could only arise from changes or additions which were not included in the job specifications on which Kellogg had based their bid. From the time of the placing of the contract with Kellogg, the Management exercised, strict control with regard to additions, improvements or design changes. These were kept to the absolute minimum and also included reductions in the job specification scope. The proof of this is the fact that all the necessary changes only resulted in a 5% increase in the fixed fee. The bulk of the capital cost increase arose during the construction phase, both in sub-contracts and in the mechanical erection. They arose from site conditions, delays, cost escalation and underestimate of the detailed scope by the main contractor.

The technology involved in the Ammonia and Urea production complex represents the highest level of sophistication and is unparalleled in Ireland. Arising from this, there was a corresponding degree of sophisticated, highly complex construction work in terms of metallurgy. The range of materials which had to be handled was immensely varied. The extremely high conditions of pressures and temperatures required for plant operation results in very heavy walled piping and other fabrications which generated a major requirement of highly specialised construction skills. We are not aware of any other industry in Ireland which has the same engineering sophistication with a corresponding requirement for new construction skills. To meet this requirement, it was necessary to operate a special training school to upgrade the quality of craft labour available. The very size of the project generated its own special problems and this is particularly pertiment in a country where such a project places a severe strain on the available skilled manpower resources.

A unique feature of the Marino Point Project is that approximately 90% of the actual construction work was undertaken out of doors and was, therefore, subject to the vagaries of climate. This contrasts with for example a typical power station where construction work is largely undertaken inside an enclosed building under reasonable work conditions. It has to be said that year-round construction out of doors generates particular pressures and tensions within a labour force and is not conducive to the development of an optimum industrial relations climate. For example, extensive wet weather, which leads to labour being ‘cabined up’ for lengtly periods, directly affects take-home pay. Moreover, the impact of adverse weather is extremely difficult to deal with and this is particularly so when construction is widespread across a very large site which cannot be temporarily enclosed for weather protection. It will be recalled that extremely adverse weather was experienced during the construction of the Marino Point Project and this fact can be verified by reference to the meteorological records.

The Marino Point construction is also unique in the extent of construction which had to be undertaken at high elevations and this gave rise to special problems on what is largely a very exposed site. For safety reasons, it was necessary to abandon construction on many days due to extremely high winds which created safety hazards.

CONSTRUCTION PERFORMANCE

The contract was awarded to the USA contractor, Kellogg International Corporation and was administered from their London Headquarters. Construction was managed on the site by a team of Kellogg personnel, under the supervision of the NET project team. Construction can be segregated into three main sectors—civil, mechanical and electrical/instrument work. Civil work includes all areas of investigation of foundations, site development, piling, buildings and supports, roads, bridges, jetty, sea wall—all those civil activities were part of the Marino Point project. Mechanical work included delivery of equipment on site by normal transport and in the case of very heavy equipment and vessels over a special temporary jetty constructed near the main site and now used as a ferry crossing for employees; erection of all plant in site; fabrication and welding of interconnecting piping; carrying out essential adjustments and modifications during commissioning. Electrical/instrument work includes all electric power distribution and controls, and all pneumatic, electric and electronic instrumentation systems.

Civil work was in the main carried out by Irish contractors and amounted to £20 million in all. Apart from one or two specialised areas, the Irish civil contractors should have been fully geared and competent to handle the civil work of this complex project. However, in many instances, the expedition with which the work was handled did not reach acceptable standards, even allowing for factors which were outside the control of individual contractors.

Mechanical erection was a major operation at Marino Point and was recognised as such from the earliest contacts by NET with contractors. All the international contractors involved at the original tendering stage were agreed that mechanical erection was a critical area with most important implications for the successful completion of the project. The NET and Kellogg teams carried out studies of available resources of pipe fabrication facilities in this country and of the capacity of the various mechanical erection firms. The intel-relationship between fabrication facilities and mechanical erection is best explained orally, but it is apparent that if these two issues were to be treated as totally unconnected areas, the mechanical erection programme would be seriously jeopardised. The investigations of Kellogg and NET established:—

(i)pipe fabrication facilities in this country at that time would not be able to cope with the job.

(ii)the scope of mechanical work was so wide in terms of volume and complexity, that NET concluded after consulting various agencies, that the Irish mechanical erection industry did not have the expertise or capacity to execute a project of such magnitude.

The nature of the work involved such advanced technology, particularly in metallurgical terms, that Kellogg had to maintain a complete management and training complement on the site. This being the case, it was decided to perform the mechanical erection work by direct hire by Kellogg. However, specialised areas were sub-contracted to Irish firms where the scope of the work made this possible. This applied to electrical and instrument installations, insulation, painting, tankage and other services.

The Construction Industry Federation raised objections to mechanical work being undertaken on a direct hire basis by Kellogg. Kellogg was accused of awarding itself a contract and both NET and the IDA were criticised for allowing this to happen. In fact Kellogg carried out the mechanical erection by direct hire with NET’s agreement in accordance with their contract and common practice on other projects.

This episode indicates the lack of knowledge by the CIF of the size and specialised nature of the Marino Point project. This is further shown by the fact that very small contractors were proposed by the CIF to handle the very large mechanical construction phase. To illustrate the scope of this mechanical erection programme, it would represent many times in volume (piping, etc.) and complexity the mechanical work content of an average power station. It should be noted that direct hire construction had been carried out for mechanical and other work on many sites, for example, Mitsul (Little Island), Irish Distillers Ltd. (Midleton), Merck Sharpe Dohme (Ballydine), — sites with which the CIF was directly identified. No objections are on record from the CIF concerning these operations which, as it happens, might have been more suitable for sub-contracting considering the relatively small scope of work involved. This suggests that the objections of the CIF to the policy adopted by NET for Marino Point might not have been made if the CIF were engaged on the site.

The CIF was extremely critical of the productivity bonus schemes operating at Marino Point to the extent that they misrepresented the payments and the essential features of these schemes. The work of the independent bonus audit group (Irish Site Management Limited) demonstrated the true situation. Bonus audits serve to discipline contractors into managing their bonus schemes in a professional manner as distinct from the totally haphazard approach that had hitherto been a feature of the industry. To illustrate the kind of misrepresentation which occurred, the following accusations by the CIF are on record:—

—“Marino Point contractors were operating schemes which could in no way be described as an incentive bonus scheme”.

Our response to this is that the Marino Point bonus schemes were the first construction bonus schemes properly, designed and implemented and subject to rigorous independent audit.

—“Employees of all contractors on site receiving the same bonus payment.”

The fact is that NO contractors ever paid the same bonuses since their schemes differed and productivity levels differed.

—“Kellogg should have operated a genuine incentive bonus scheme based on small groups, usually not exceeding 10 men”.

This proposition when related to a peak mechanical labour-force in excess of 700 men, where mobility of labour with groups on a day to day basis regularly occurred, would have been totally unmanageable. But more importantly, the idea of introducing different bonus payments to employees of the same contractor on the same site is a formula for industrial relations chaos.

—“Civil contractors making bonus payments of 70p per hour in November, 1976”.

The audit figures show that actual bonus payments were of the order of 15p to 20p per hour.

—“Marino Point contractors operating standing bonus, i.e. fixed bonus arrangements, unrelated to productivity”.

That this allegation was utterly false is again demonstrated by the audited weekly bonus figures for each site contractor, showing the fluctuation in the bonus payments based on measured productivity from week to week.

It was recognised by NET that the single factor most likely to influence successful construction of a major project in Ireland would be the effectiveness of control of the Industrial Relations function. This involved not only management of labour as normally understood, but also training requirements, safety management, together with the introduction of modern proved techniques relating to control of sensitive industrial relations areas such as productivity bonus schemes. It would also be necessary to negotiate a Site Agreement for Marino Point to provide well-defined site employment conditions which would be required by contractors tendering for various elements of construction work. In considering the routine labour relations function, we recognised that the successful control of this function could only be achieved by having a strong full-time experienced industrial relations team on site to permit problem areas to be anticipated and analysed on a continuing basis.

Our contract Agreement with Kellogg placed the responsibility for control of all construction work in their hands, including naturally the responsibility for handling the industrial relations function. Under no circumstances would we consider it appropriate to conclude a contract for a project of this type which would exonerate the contractor from responsibility for one of the critical construction management areas. We would not consider it appropriate that this key area should be controlled by a third party. In pre-award discussions with Kellogg it was apparent that they were prepared and anxious to introduce innovations which would prove beneficial to the project in terms of maintaining stable labour relations. One of these innovations was a proposal to introduce a system whereby productivity bonus payments would be audited by an independent group based at site. Productivity bonus payments can prove to be extremely contentious on any site and invariably give rise to work stoppages, which in turn delay projects and add to costs. The introduction of an independent audit would serve to remove any suspicion at either Union or employee level as to the validity of the bonus payments. It was recognised that the tradition relating to bonuses was suspect with contractors making payments which did not bear any relation to the levels of productivity being achieved.

NET decided that the industrial relations responsibility should be under the direction and control of the main contractor, Kellogg, supported as appropriate by Kellogg’s Irish sub-contractors, together with the full-time involvement of NET personnel monitoring Kellogg’s day to day performance.

NET was aware of the probability that the decision to exclude third parties such as the CIF from direct involvement in the industrial relations area could give rise to a hostile attitude from the CIF. This has proved to be the case.

The industrial relations record of the Marino Point project shows a high level of unofficial industrial action. If Kellogg is to be held responsible for unofficial industrial action, then it might be correct to say that industrial relations was managed poorly. This would place responsibility on Kellogg for inter-Union disputes, demarcation disputes, wildcat actions and other activities which disrupted and delayed construction. However, it could be considered unreasonable to hold Kellogg responsible in this way, particularly since it has not been demonstrated that the action or inactions of Kellogg were responsible for the unofficial industrial actions which occurred.

It has been stated that the development and application of industrial relations strategy was diluted by the committee structures that surrounded it. A site contractors committee is a very normal feature for a large multi-contractor site and it is not clear what other arrangement could apply to provide for good communications and decision making, or what dilution of industrial relations strategy occurred.

The statement that Kellogg initially attempted to manage industrial relations from London is misleading since it would disregard the fact that a full-time experienced industrial relations officer was resident at site prior to the start of construction and, under the direction of Kellogg Construction Manager, managed the industrial relations function. As the job progressed, the site industrial relations team expanded to include full-time industrial relations personnel and Irish consultants. It should be noted that it is normal on international projects of this kind to provide advisory services to the site from the contractor’s Home Office for various construction requirements. The Marino Point project differed from other Irish projects in that the site industrial relations team consisted of more than one industrial relations officer to provide for the kind of planning and strategy development which a major site requires.

The suggestion that the Site Agreement was negotiated under pressure is hardly correct. Negotiations commenced in April, 1975, and were completed in July, 1975. There is nothing in the negotiated Site Agreement to suggest that it is in any way inferior or the product of negotiating under pressure and this document when compared with earlier Site Agreements negotiated in this country would be regarded as a model of its kind.

The criticism that a Site Agreement was negotiated prior to the commencement of construction, disregards the advantages in commercial and industrial relations terms of having an agreed basis for undertaking construction.

It is incorrect to state that the Site Agreement was negotiated with ICTU and Senior Union Officials. In fact, it was negotiated exclusively with local Cork Trade Union Officials. Therefore, the arguments about the lack of performance by local Union Officials in the resolution of problems arising from the application of the Site Agreement do not have a basis.

It is not correct to say that NET promoted vetting of industrial relations strategies which emerged from contractor committee meetings because of lack of confidence in Kellogg. The fact is that Kellogg were obligated to review all such matters with NET at all stages in the project, including proposals regarding Site Agreement revisions and particularly those having effect on the cost of the project. This is very normal for reimbursable cost projects and at no time was there an intent that Kellogg would act unilaterally in this area.

One of the yard-sticks used to evaluate the performance of the labour force against the Site Agreement obligations was to assess whether or not they passed unofficial pickets. A similar basis is used to evaluate the relative industrial relations management performance by Kellogg and its sub-contractors. This yard-stick is hardly a reasonable one when the traditions of labour with regard to passing pickets, official or unofficial, in this country is taken into account. Again, this yard-stick results in an overly unfair evaluation of Kellogg’s industrial relations management performance as against the sub-contractors performance. The following tabulation shows that, contrary to this assessment, the Kellogg operation resulted in substantially less disruption to the site than that of the sub-contractors, and when cognisance is taken of the fact that the Kellogg operation accounted for approximately 45% of the total working days on the project, it can be seen that in comparative terms the Kellogg performance under this heading was substantially better than that of the sub-contractors.

The assessment that the Site Agreement was completely ignored by the majority of the employees throughout the life of the project is a gross overstatement. The terms of the Site Agreement as detailed in the 32 sections of the document were not disregarded. In contrast, it is perhaps significant that the traditionally emotive troublesome problem of handling the redundancy of construction site labour was negotiated and implemented for this very large site without significant disruptions. Without a comprehensive provision in the Site Agreement for handling redundancies, it is questionable if this success could have been achieved.

CAPITAL COST

The capital cost including finance charges, up to the coming on-line of the Ammonia and Urea plant amounted to £137 million. Of this total sum, the amount involved in purchases of materials outside this Country was £30 million, the financing charges were £23 million and the major share of the balance of the total cost was incurred on the factory site.

The procedure for handling the control of expenditure was agreed with Kellogg from the outset. For each item, Kellogg was required to obtain competitive tenders and submit to NET for checking and approval. In all, there were over 17,500 items of individual purchases, not including the management of sub-contractors and direct hire Kellogg employees on the site itself. The Consultants to the Committee have investigated these arrangements and have recorded their verification of the proper operations of this system, except for a criticism about uncrossed cheques, which did not lead to any irregularity.

The control of expenditure on the site itself was fully organised and outgoings have been fully accounted for.

In December, 1974, the Board of NET approved the project on the contractors estimates valid from 1st July, 1974, with provision for escalation and other project costs. Kellogg were awarded the contract in December, 1974, and they immediately invited bids for major equipment with a view to finalising the estimates. The initial revised estimates submitted by Kellogg were referred back by NET for further investigation and the final estimates were not available until October, 1975. This gave a final cost figure of £71.8 million. Also some of the NET costings were updated on the basis of later information which had become available. In October, 1975, it was decided to fix the total project cost to be financed at the figure of £71.86 million, and this was submitted to the European Investment Bank in the Company’s application for finance which was approved in March, 1976. In August, 1976, the prediction of total project cash to be financed had risen to £80 million as set out in the prospectus submitted in connection with the syndication of the £40 million Dublin/London credits. Thereafter the revised figure of £80 million was adopted as the budget for the project and the Board received regular reports of progress. The Management had the responsibility for controlling the costs of the project against the budget and the Board did not require approval for separate cost transactions or cost areas as it was considered that this would involve delay in sanctioning expenditure. The Board were satisfied that the Management were in constant control of the cost situation. The Consultants criticise the Board for the extent of authority delegated to the General Manager and the Head of Development in sanctioning the purchase of equipment. While the Consultants’ statement of this authority is not disputed, attention is drawn to the following facts:—

(i)The eventual expenditure on material procurement was within a few percent of the budget figure, and

(ii)the total outlay on materials accounted for less than 25% of the final project cost.

The major increases in cost arose on site where delay in execution of the job and underestimation of the original scope by the main contractor resulted in increased construction and other time-related costs, namely—Project Management, Field Administration and Interest Charges.

The contract expenditure was closely monitored at all times by an NET audit team which ensured that procedures laid down were adhered to. In the initial stages this resulted it NET locating qualified personnel in Kellogg International Corporation’s London Office to review all quotations, recommendations and Bid Tabulations. Bid Tabulations were compared with the original budget or check estimate. In cases where items were in excess of the guidelines, these were referred to senior management for approval.

At all times, the Management were aware of the effect on cost of an extended schedul and excessive delays and took all options open to them to progress the job faster.

By late 1976, most of the major items of equipment were on order and costs were on budget. In the course of the next year it became evident that the site construction would take considerably longer than originally estimated and the Board were kept constantly advised of the expected delays and the cost implications of these delays.

AMMONIA AND UREA PLANT UTILISATION RATES

The Consultants make reference to the rates assumed by the Company in relation to on-line time of the Ammonia and Urea plants. The figures which have been adopted by NET are as follows:—

Design on-line time (utilisation rate) of 322 days per annum the Ammonia plant.

Design on-line time (utilisation rate) of 310 days per annum the Urea plant.

This information was based on the performance of Ammonia plants and Stamicarbon Urea plants. On examination of the average performance of gas based Ammonia plants in operation in Europe and the United States and taking into account the particular performance of Kellogg plants, NET arrived at a figure of 322 days.

The World Bank use 330 days for both Ammonia and Urea plants and rates in excess of 330 days have been achieved for both Ammonia and Urea. The Fertiliser Institute of USA, in its latest report in 1979, states:—

“The operating rate of Anhydrous Ammonia producers during the first half of this year was 89.5% up 7 percentiles from the comparable 1978 period. The figure stems from a survey taken by the Fertilizer Institute which covers only members reporting data and excludes considered inactive or shut down.”

The production figure for 1980 which NET were using in their projections was based on the fact that NET did not intend to have a planned shutdown of the Ammonia plant in 1980 and because of the Ammonia plant’s initial performance in 1979, NET could reasonably expect the achievement of 322 days in 1980 when a planned overhaul of 21 days had been excluded. However, the electricians strike lost us over 5 weeks production time and the projections have been revised accordingly (submitted to the Committee in June, 1980).

NET would question the information of the Consultants in relation to similar plants coming on stream recently in Western Europe. NET is aware of the very good performance of the latest ICI plant which has exceeded all expectations with regard to capacity and on-line time. Apart from Marino Point, there has not been a Kellogg gas plant commissioned in Europe recently, but the existing European Kellogg plants are performing well to the best of our knowledge. It is known that the Shellstar plant in the UK gave a very poor performance in its first few years of operation. Initial problems were experienced by ESSO in Rotterdam when they commissioned their plant and had major initial teething problems with their gas turbine drives. It may be that the Consultants to the Committee based their comments on these plants which had elements of novel technology. NET, however, have installed a plant with proven technology which has given high utilisation rates elsewhere. It is unreasonable for the Consultants to suggest that the Marino Point plant cannot reach utilisation rates of 322 days for the Ammonia plant and 310 days for the Urea plant in future years.

NATURAL GAS

The price paid by NET for gas is based on the price negotiated mainly by NET with Marathon in the national interest, in addition NET has to pay its share (40%) of the capital cost incurred by Bord Gais in its installation. The price structure with Marathon has a factor of escalation based on movements in international oil prices and in the movement of the US Dollar against the Irish pound.

The final price paid by NET to Bord Gais includes all elements of return to Marathon and capital and operating costs of Bord Gais. To that extent, the question of cost to the Irish taxpayer does not arise. The long term benefit of the original NET contract with Marathon is that it now represents a very favourable base for any future negotiations by the Government in regard to further hydrocarbon discoveries.

The argument that NET enjoys a subsidy is purely theoretical. It is alleged that a higher price could be got for natural gas than is being paid by NET and that this constitutes a subsidy. What in effect is being said is, that while NET negotiated a very keen base price for natural gas with Marathon, the Irish Government should now charge an energy related price to NET in order to retain the difference for the benefit of the Exchequer.

The position of NET in this situation is unequivocal. At the time that NET entered into a contract for Marino Point, with the approval of the Government, it was one of the major considerations that the Company had negotiated a favourable price for natural gas. The terms of offer circulated to the Consortium of Banks by the Managers (AIB Ltd., Dublin and Warburgs of London) in August, 1976, included the following paragraph:—

“NET has satisfied itself that the price at which it has contracted for gas supplied, taken together with pipeline throughout charges, compares satisfactorily with prevailing price available else where in Europe. The supply contract contains provision for only limited price escalation, and in so far as the Company can judge, this satisfactory price relationship is likely to be maintained, particularly as in NET’s view world energy prices may be expected to continue to rise in the long term”.

The Marathon gas field would not have been developed where it not for the ESB and NET taking up the output of the field. The reserves have been confirmed for a minimum of 20 years and NET has a contract for that period which is not interruptible. The contract with the ESB is interruptible on the basis that alternative materials for electricity production are available. The fact is that there are no other major consumers of consequence for natural gas in this country. Every effort is being made by the IDA and Bord Gais to find alternative users for the gas and NET has in fact been able to attract foreign industrialists in the chemical field who have shown a strong interest in major projects based on natural gas. It has been made clear to all concerned that any such interests would have to negotiate a price for natural gas on their own merits and completely independent of the original NET negotiations with Marathon.

NET is not in a position to advise the Committee of the price which it pays to Bord Gais for natural gas. Such information is confidential to the Minister for Industry, Commerce and Tourism. However, the Committee will no doubt be interested in the development of natural gas prices throughout the world. The first contracts which were at very low prices by modern standards. At that time, natural gas was competing with fuel oil costing less than 5% of today’s prices for fuel oil in world markets. Some of those original gas contracts are still extant and at prices under 50 cents per million BTU. According as each gas field was developed, new contracts were negotiated at higher prices. In 1974, when NET was busily negotiating with Marathon, we were in close touch with the Government Agencies concerned and particularly with the British Gas Corporation, to ensure that we achieved the best price possible, consistent with the proper development of the Kinsale gas field. It is widely acknowledged that such a position was successfully achieved. The price now paid by NET for natural gas is very close to the price paid by our main competitors. Particulars of a survey carried out in USA in 1979 for the Fertilizer Institute are attached.*

There is no question of direct comparison between prices paid for natural gas to industry and prices paid by householders for domestic gas. The distribution network required for supplying domestic users is totally unrelated to the capital cost of supplying a major consumer such as Marino Point and the total capital cost of transmission and distribution would have to be taken into account before comparisons can be made.

September 1980

* Not published by Committee.